Market Update

This was a very interesting month because one economist got quite of bit of attention for his opinion, which is not shared by most economists; this is probably what created the stir. That opinion is that the mortgage market is heading for another crash. Richard Bove, an economist at Rafferty Capital Markets, suggests that we need to be aware and ready for another collapse. He claims this is likely for several reasons, including the tapering of the Fed debt buying that has been reducing over the last several months and the fact that our government plans to wind down Fannie Mae and Freddie Mac. The fear is that with mortgages going into the private market, it is likely that the 30 year fixed rate loan will die and that investors will demand higher returns, which would require much higher interest rates. If interest rates skyrocket, we will have a crash.

I believe this is a fierce overreaction and a few steps away from reality. The truth is that the market has done very well with the bond buying tapering and although the government plans to stop pumping new money into the market it will continue to reinvest profits and return of capital. The pace of the reduction of this economic influence will be gradual and should not create a spike to rates. I believe that losing Fannie and Freddie would change the landscape of the mortgage markets, but I don’t see a collapse. Yes, the 30 year mortgage might die, or drastically reduce, but how many people really keep a loan for 30 years anyway? As long as the payment is based on a 30 year amortization, a 10 or even 5 year loan should be enough to keep people buying homes. It is also important to mention that there is no end to Fannie and Freddie in site. In fact, there have been several proposals presented and none of them have picked up momentum. In a report put out by the Kroll Bond Rating Agency, there is no need to change the way you operate when it comes to Fannie or Freddie. They don’t see anything changing with the two giants until at least 2016. The big concern, a spike in rates, could throw the markets into a tailspin. Yes rates will need to go up at some point, but I don’t see a spike big enough to create a crash.

The market is very strong and getting better. Nationally the GDP (which is a primary statistic used to gauge the overall economy) growth beat expectations. That helps fuel confidence, which is really what the economy is all about. Even with the world turmoil, our consumer confidence ticked up for the fourth straight month, reaching a seven year high.